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Ku5htr1m March 11th, 2016 11:36 AM

Financial econometrics - exam question
Consider the following simultaneous system of equations,

$\displaystyle \[\begin{array}{l}
{y_t} = \beta {x_t} + \delta {p_t} + {u_t}\\
{x_t} = \gamma {y_t} + \theta {q_t} + {v_t}

where p t and q t are exogenous variables.
(a) You are interested in estimating the equation for y t . Please describe in a precise and detailed
manner how you would achieve a consistent estimator. [5 marks]
(b) The equations stated above for y t and x t are the structural equations. What is the reduced-form
equation for y t ? [5 marks]

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